Update: The Canada Revenue Agency announced a last-minute extension of this deadline on Oct. 31.
A little-known, new federal tax aimed at foreign real-estate investors has the risk of steep financial penalties for some Canadian homeowners if they fail to file required paperwork by Oct. 31 this year, many tax accountants are warning.
Ottawa’s underused housing tax (UHT), which took effect at the start of 2022, imposes an annual 1 per cent levy on the value of residential real estate owned by foreign nationals when the property is considered to be vacant or underused.
But accountants across the country say some of the new rules also impose tax-filing obligations in certain scenarios on homeowners who are Canadian citizens or permanent residents. While Canadians generally won’t have to pay the tax, failure to file on time – if only to claim an exemption – can result in penalties starting at $5,000 for each affected homeowner.
In many cases, the legislation requires Canadians to file returns when they hold residential property in trust or in a partnership, said John Oakey, vice-president of tax at Chartered Professional Accountants of Canada.
The Underused Housing Tax affects more people than expected
“There’s significant concern about individuals not being aware of their reporting requirements,” said Mr. Oakey, especially in the case of Canadians who don’t have sophisticated tax advice.
Among those affected are Canadians who co-signed mortgages with their adult children and were added to the title of the kids’ property only because they helped them buy a home, said Hugh Neilson, a chartered professional accountant and director of taxation services at Kingston Ross Pasnak LLP.
So are adult children who hold title to their aging parents’ home, an arrangement commonly used to simplify the transfer of the property to the kids when the parents die, he added.
Another possible scenario: someone who holds title to a property used by a relative with mental disabilities, according to an article discussing the UHT published on the CPA Canada’s website.
Couples who own rental property may also have to file, as they may be considered a partnership from a legal point of view, Mr. Neilson said.
One issue is that Ottawa has consistently presented the UHT as a measure focused on foreign nationals, making it easy for everyday Canadians to miss the fact that the legislation also includes requirements for citizens and permanent residents, Mr. Oakey said.
Another issue is that who may be deemed to be holding property in trust or in a partnership isn’t always obvious.
For example, consider parents who hold title to their adult child’s home with the understanding that they have no power or say over the property other than at the child’s direction. That’s a so-called bare trust arrangement, which would likely trigger the filing obligation under the UHT, Mr. Oakey said.
But there’s often no requirement for families to sign a bare trust declaration or otherwise set out their intentions in writing, he added. Canadians could be affected by the UHT even if they never filled out paperwork mentioning a trust arrangement.
Similarly, what constitutes a partnership is often murky. From a legal standpoint, a partnership exists when two or more people come together in pursuit of profit. So when a couple owns rental property, it may not be immediately clear whether they are a partnership or whether they just jointly own property.
“It’s not a beautiful line separating the two,” Mr. Oakey said. “You have to really look at the facts of the situation to try to make that determination.”
Given the uncertainty over whether UHT rules apply to Canadians in certain circumstances, some accountants are opting to err on the side of advising clients to file to minimize the risk of hefty financial penalties, according to Mr. Oakey. It’s a sensible approach, he said, but the drawback is taxpayers would then be stuck filing UHT forms every year.
Those filing requirements can be significant. Each owner listed on title – including in the case of couples – would have to file individually, with separate files for each property, Mr. Neilson said.
Canadians should also note that the legislation has set April 30 as the deadline to both file a return and pay any amounts owing under the UHT from the previous calendar year. However, for filings and payments related to 2022, the first year the new rules came into effect, the Canada Revenue Agency has waived any penalties and interest this year until Oct. 31.
The tax deadline for 2023 remains April 30, 2024.
